FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
October 2, 2018

1. GALLUP Says Things Look Bad For GOP in November

2. Congress Quietly Passes Another Huge Stop-Gap Spending Bill

3. Major Central Banks Are Reducing Their Balance Sheets

4. Trillion Dollar Budget Deficits to Become “New Normal”

5. US Debt Tops $21.5 Trillion, More Than Doubles in a Decade

Overview

We touch on several topics today, rather than one main issue. Sometimes, that’s more interesting. Let’s get started.

Congress quietly passed a new bill expanding federal spending by an additional $854 billion last week before they left Washington. It hardly made any news at all. Sadly, that $854 billion only funds the government through early December.

On another front, major central banks are beginning to reduce their holdings of government debt. The US Fed has been doing this for a while now, along with raising interest rates. The question is whether the US economy is strong enough to withstand both.

Next, the US federal budget deficit is projected to top $1 trillion in FY2019, which began yesterday, and continue to rise over the next decade. Our national debt of $21.5 trillion could approach $30-35 trillion over the next 10 years. This is very bad.

But before we get to those topics, I want to repeat something I wrote about in my Blog last Thursday, which is important for all of my readers, not just those who subscribe to my Blog. If you read my Blog every week, indulge me. Everyone needs to know about this.

GALLUP Says Things Look Bad For GOP in November

We all have seen political polls and news stories regarding a “wave election” in the upcoming mid-term elections, meaning that one Party or the other will win big. We’ve all heard that the Party of the sitting president almost always loses seats in Congress in the mid-term elections.

As such, most commentators in the mainstream media today are predicting a “blue wave” where the Democrats retake majority control of the House of Representatives and maybe even the Senate. Some others still predict a “red wave” election where Republicans add to their power in the House and the Senate in November.

The problem with both of these predictions is that elections all depend on voter turnout. The fact is, no one can accurately predict voter turnout by either party in advance. You just never know. For that reason, I have pretty much downplayed these recent polls and stories predicting a blue wave or a red wave in November.

But last week I ran across some new information that has me rethinking everything. Here goes.

Presidents Below 50% Approval Lose Average 37 House Seats

I ran across a statistic last week that stands out above all the polls and surveys. It is not based on polls or surveys – it is based on facts. It comes from none other than GALLUP. Here it is:

Presidents with an approval rating below 50% lose an average of 37 seats in the House of Representatives in the mid-term elections. President Trump’s approval rating is in the low 40s. Thus, he could lose seats in the Senate too.

By comparison, presidents with an approval rating above 50% have lost only 14 House seats on average in the mid-term elections since GALLUP has been keeping records. This new information makes it even more likely that the Dems could retake control of the House in November. Let that sink in.

Read my complete analysis in my Blog last Thursday. You need to know about this!

Congress Quietly Passes Another Huge Stop-Gap Spending Bill

Without much fanfare or public discussion, Congress decided to push the US into deeper fiscal irresponsibility. Last week, the House quietly passed another Continuing Resolution (CR) spending bill to keep the government from “shutting down” prior to the mid-term elections.

The House quietly passed an $854 billion spending bill to avert an October shutdown, funding large swaths of the government while pushing the funding deadline for others until December 7. The House bill passed overwhelmingly 361-61, a week after the Senate passed an identical measure by a vote of 93-7.

The important thing to keep in mind is the fact that the latest $850 billion is not a budget – it’s a CR. For almost a decade, Congress has failed to pass and live within a budget as it is legally required to do. Of course, voters don’t seem to care if lawmakers ignore their responsibilities, so they just keep us headed for a debt crisis.

The Committee For a Responsible Federal Budget made the following statement:

“We’re pleased policymakers have likely avoided a [government] shutdown and actually appropriated most of this year’s discretionary budget on time. But let’s not forget that Congress did so without a budget and had to grease the wheels with $153 billion [in pork!] to pass these bills. That isn’t function; it’s a fiscal free-for-all.”

Of course, with trillion-dollar deficits just around the corner, the negative impact from unbridled spending and debt increases will begin to reverse the positive economic effects from deregulation and tax reform at some point.

The bigger problem with the $854 billion CR just passed by the House and Senate is that it only covers spending from now until December. This means lawmakers will face another possible government shutdown before the end of the year. What else is new?

Major Central Banks Are Reducing Their Balance Sheets

As shown in the chart below, the major central banks are reducing their balance sheets simultaneously, meaning they are selling off some of the assets they own. They are doing this even though demand for sovereign debt is reportedly falling. This has some watchdog groups concerned.

“Central bank balance sheets have shrunk by over half-a-trillion dollars since March. This decrease in global liquidity – in the face of a global slowdown – raises the risk of policy mistakes.” – Economic Cycle Research Institute (ECRI).

Notice in the chart above that central banks’ balance sheets in all four regions – Europe, China (PBoC), Japan and the US – started to decline earlier this year, after rising sharply since late 2008. This trend is expected to continue and coincides with the Fed’s plan to raise the Fed Funds rate at least four more times between now and the end of next year.

The Federal Reserve’s balance sheet consists mainly of US Treasuries and mortgage-backed securities, and it peaked at apprx. $4.5 trillion in September of last year.

This raises the question of whether the US economy is strong enough to withstand the Fed shrinking its balance sheet and multiple interest rate hikes at the same time. I think the answer is yes, but that’s a detailed discussion I’ll save for another time.

Sadly, Trillion Dollar Budget Deficits to Become “New Normal”

Trillion-dollar deficits are coming back to Washington, and this time they could be here to stay. The White House Office of Management and Budget (OMB) projects that the federal budget deficit will top $1 trillion in FY2019 which began yesterday, up from $666 billion for FY2018.

Unlike the trillion dollar budget deficits that occurred during the Obama administration that were temporary and largely the result of the Great Recession, the Trump deficits are projected to exceed $1 trillion permanently. The Congressional Budget Office (CBO) projects the deficit to hit $1.5 trillion by 2028, and that is probably optimistic.

Thanks to the anticipated rise in interest rates coupled with growing debt, the CBO now projects that annual interest costs alone will hit $915 billion by 2028. “That's roughly triple what they are this year in nominal terms and roughly double when measured as a percentage of GDP," the CBO said.

The Trump deficits are the result of changes in federal spending and revenue that will continue to be in place until some future president and Congress decide to reverse them – that is, to increase taxes and/or cut spending on popular programs.

Not only has there been little appetite to do that, many in Congress and the Trump administration seem to be hell-bent on ignoring the deficit and national debt and increasing spending and reducing revenue (more tax cuts) even further.

In conclusion, our national debt, including “debt held by the public” and “intergovernmental debt,” now totals $21.51 trillion (the chart below is a little dated). With annual budget deficits of $1 trillion or more, the national debt is on-track to balloon to $30-35 trillion over the next decade.

For the record, I don’t believe that will happen. At some point, investors will decide that it’s just too risky to own US Treasuries, and we’ll face another financial crisis that could be much worse than 2008-2009.

But in the spirit of full disclosure, I have been saying this for a very long time, and yet our national debt keeps exploding year after year and decade after decade. Still I say, it can’t last forever, and it will end very ugly.

I’ll get off my soapbox now.

All the best,

Gary D. Halbert

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